In private equilibrium,a positive production externality will lead to __________; a negative consumption externality will lead to ___________.
A) SMC less than PMC; SMC greater than PMC
B) SMC less than PMC; SMC less than PMC
C) SMB less than PMB; SMC greater than PMC
D) SMC less than PMC; SMB less than PMB

Question

Quizplus · Accepted Answer

In private equilibrium, the marginal social cost (SMC) and marginal private cost (PMC) are equal, as are the marginal social benefit (SMB) and marginal private benefit (PMB).

A positive production externality is when the production of a good or service generates a positive spillover effect on third parties. This means that the SMC will be less than the PMC since the PMC only reflects the costs incurred by the producer, while the SMC takes into account the additional benefits enjoyed by third parties. Thus, the producer will not take into account the full social cost of their production, and a market failure occurs.

A negative consumption externality is when the consumption of a good or service generates a negative spillover effect on third parties. This means that the SMC will be greater than the PMC, since the SMC will reflect the additional costs incurred by third parties, while the PMC only reflects the benefits enjoyed by the consumer. Thus, the consumer will not take into account the full social cost of their consumption, and a market failure occurs.

Therefore, D is the correct answer because it correctly reflects the relationship between a positive production externality and a negative consumption externality in private equilibrium.

In Private Equilibrium,a Positive Production Externality Will Lead to __________;